How is the economic impact of the coronavirus? An economist from the University of Chicago studied Italy and considered energy demand among the parameters.
While coronavirus infections rage around the world, some of the most affected areas (China and today Italy) are already seeing the demand for electricity collapse. Could it be a sign of things to come?
The University of Chicago economist Steve Cicada examined what happened to energy demand in Northern Italy. Cicala, a professor at the Harris School of Public Policy, crossed the data from the Lombardy regional network with the meteorological ones. He estimated that energy demand has plummeted in Northern Italy since mid-February.
The road map in Lombardy
On Friday, February 21, life in the region was largely normal. The following day, the Italian government began to institute quarantine measures. From Monday the 24th, energy demand began to slow down. As the table below shows, there was a spike in energy just before the government instituted the nationwide lockdown about two weeks after March 10th. About a week later, the demand for energy collapsed: the decrease was 18% compared to just before the restrictive measures.
An expert in the economics of environmental and energy policy regulation, Cicala said energy demand could be a real-time indicator of the impact on the Italian economy.
A parameter, the one observed in Italy, which could indicate the near future of states (such as the USA) that are a few days behind the progress of the pandemic.
“If wages and employment follow what is happening in the electricity demand data, there are a lot of people who will need help”, said Cicala, who is also a research affiliate of the Energy Policy Institute at the University of Chicago.
When there is a major shock to the economy, he explained, other indicators such as employment may lag in reflecting the impact. This is because companies often fire workers as a last resort (in the Italian case there is even an imposed block on layoffs). In contrast, electricity demand shows the most immediate change and is a broad measure of economic activity.
Collapse in energy demand, a parameter that "read" the 2008 crisis well
This model worked in describing the last recession in the United States. The collapse in energy demand in that case brought forward by a month the official start date of the recession in December 2007, according to the National Bureau of Economic Research. The estimate required the enormous collection of the next 12 months of energy data, but allowed the construction of a model.
When considering what countermeasures may be needed to mitigate the economic effects of the coronavirus, a real-time indicator of the strength of the economy available to policymakers is of the utmost importance.
The Italian government should take this into account when designing aid to the sectors most markedly affected by this period of crisis and what is about to come.
Source: University of Chicago
